Financial advisers for Orange County, Calif., are asking Wall Street firms to come up with a plan to restructure the county's massive financial liabilities through the sale of municipal bonds.
Executives at Salomon Brothers Inc. last Wednesday mailed request for proposal documents to as many as 17 municipal market firms, asking for ideas on how the financially trouble county could issue bonds "in connection with a restructuring [of its] financial liabilities."
Earlier this month, the county filed for Chapter 9 bankruptcy protection and defaulted on a $110 million bond issue after reporting more than $2 billion in losses in its short-term investment pool.
Orange County faces millions of dollars in liabilities to holders of its short-term and long-term debt, but it is unclear if the county's liabilities will include money owed to municipalities that participated in the short-term investment pool.
While the RFP is clearly asking for Wall Street's advice on solving the county's problems, the three-page document provided few details about the county's intentions.
Potential underwriters were asked to describe their experience in helping "issuers with similar financing needs" and to list executives who would work with the county.
The county also asked firms to describe what services they "would provide in connection with the assignment."
The most detailed question involved potential conflicts of interest between the county and the potential underwriter. The RFP, for example, asked if the firms had acted as underwriter for any of the pool participants, or had made loans or extended credit to the county.
The document did not say if the restructuring would occur without the guidance of the bankruptcy court, or if the county might turn solely to the municipal market to create a bailout plan that calls for the issuance of municipal bonds.
Officials at Salomon Brothers would not comment about the RFP. Thomas W. Hayes, chairman of the county's financial restructuring team, did not return telephone calls.
County spokeswoman Sandra Sternberg said, "There is no [bond] issue being considered, there is no dollar amount being considered, and there is no time being considered."
"The RFP is just so we will have somebody on hand for the time when the board [of supervisors] decides, if it decides, it wants to go out to the market again," Sternberg added.
But several municipal market experts, including underwriters that may respond to the questionnaire, say the RFP is an attempt by the county to seek a public finance solution to its fiscal problems.
Other troubled municipalities, such as New York City and Philadelphia, have in the past called on investment bankers to create bailout plans through the sale of municipal bonds. In those cases, bankers secured tax revenue streams to cover principal and interest payments on the bonds.
Orange County may be looking for similar advice.
"It's difficult to say what this means, but the RFP suggests that officials there are looking for some kind of municipal finance solution, or bonding solution," said David L. Dubrow, an associate at the law firm of Mudge Rose Guthrie Alexander & Ferdon. "And this solution could be inside or outside of bankruptcy court."
The firms that received the RFP include Goldman, Sachs & Co; Lehman Brothers; Smith Barney Inc.; CS First Boston; Paine Webber Inc.; Bear, Stearns & Co.; J.P. Morgan Securities Inc., and Morgan Stanley & Co.
Others are: Prudential Securities Inc.; BA Securities; AG Edwards & Sons Inc.; Dillon Read & Co.; Stone & Youngberg; Merrill Lynch & Co.; Donaldson, Lufkin & Jenrette Securities Corp.; Artemis Capital Group Inc.; and Pryor, McClendon, Counts & Co.
Several market experts said the RFP is good news for holders of Orange County debt.
For example, several leading municipal market lawyers said bondholders are more likely to receive all their principal and interest if the county goes outside of the bankruptcy court to restructure its liabilities.
These experts point to the bailouts of New York City, Philadelphia, and even Bridgeport, Conn., as examples where bondholders were made whole, as the municipality emerged from a severe financial crisis.
But it is unclear if the county will turn to the market for a solution. "I think there is a battle royal going on between the people in Orange County who want to do this in bankruptcy court and those who want a public finance solution," one prominent bond counsel said.
